Country update URUGUAY

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Tyrone Malone
5 years ago
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1 Summary Uruguay s economy continued to grow quickly in 2011, although growth decelerated in the course of the year. The deceleration has been welcome, as the economy was close to overheating, with especially the labor market being very tight. The tight labor market has contributed to inflation, which rose to 8.1% in During 2011, the central bank tried to control inflation by raising its benchmark interest rate by 225 basis points to 8.75%. Meanwhile, the debt profile of the government has continued to improve, while the debt-to-gdp ratio has also declined further. Uruguay has maintained its investor friendly policies and the country continues to attract large inflows of FDI. However, the country might be hit by Argentina s balance of payments problems and policies, as these are likely to result in less FDI inflows and tourism income. However, Uruguay s large foreign reserve holdings provide an important cushion. Things to watch: Balance of payments problems in Argentina Prices of agricultural commodities Stubbornly high inflation Author: Contact details: Herwin Loman Country Risk Research Economic Research Department Rabobank Nederland P.O.Box 17100, 3500 HG Utrecht, The Netherlands +31-(0) H.Loman@rn.rabobank.nl March 2012 Rabobank Economic Research Department Page: 1/5

2 Uruguay National facts Social and governance indicators rank / total Type of government Constitutional republic Human Development Index (rank) 48 / 187 Capital Montevideo Ease of doing business (rank) 90 / 183 Surface area (thousand sq km) 176 Economic freedom index (rank) 29 / 179 Population (millions) 3.4 Corruption perceptions index (rank) 25 / 183 Main ethnic groups White (88%) Press freedom index (rank) 32 / 178 Mestizo (8%) Gini index (income distribution) Black (4%) Population below $1.25 per day (PPP) 0% Main religions Roman catholic (47%) Nondemoninational (23%) Foreign trade 2010 Head of State & Government Jose Mujica Cordano Main export partners (%) Main import partners (%) (president) Brazil 20 Argentina 15 Monetary unit Peso (UYU) China 13 Brazil 14 Argentina 7 China 14 Economy 2011 Venezuela 6 US 9 Economic size bn USD % world total Main export products (%) 2011 Nominal GDP Meat & products 19 Nominal GDP at PPP Processed rice 5 Export value of goods and services Wool & products 3 IMF quotum (in mln SDR) Hides & skins 3 Economic structure year av. Main import products (%) 2011 Real GDP growth Intermediate goods 61 Agriculture (% of GDP) 10 9 Consumer goods 24 Industry (% of GDP) Capital goods 16 Services (% of GDP) Standards of living USD % world av. Openness of the economy 2011 Nominal GDP per head Export value of G&S (% of GDP) 28 Nominal GDP per head at PPP Import value of G&S (% of GDP) 26 Real GDP per head Inward FDI (% of GDP) 5.2, CIA World Factbook, UN, Heritage Foundation, Transparency International, Reporters Without Borders, World Bank. Introduction and update Uruguay s economy has continued to perform well, with GDP growing by 5.7% in Investment and, particularly, consumption were the main drivers of growth (see figure 1). However, growth decelerated in the course of the year, with economy growing by only 3.5% year-on-year in the fourth quarter of 2011, due to the closure of a refinery and a drought. Beef exports, Uruguay s most important export product, fell by 8% in volume terms in 2011, but grew 18% in income terms (to USD 1.3bn) thanks to higher international prices. In 2012 and 2013, economic growth is likely to slow to roughly 4%, thanks to a less benign global environment and a tighter monetary policy. The slowdown is welcome, as Uruguay s economy has been close to overheating. For example, the labor market has become very tight, as unemployment reached historically low levels by falling below 6%. In January 2012 unemployed increased to 5.7%, up from 5.3% in December, but this might be partially related to seasonal factors and still leaves unemployment at a low level. The tight labor market has resulted in rapidly rising nominal wages and high inflation, which increased to 8.1% in During 2011, the central bank tried to control inflation by raising its benchmark interest rate by 225 basis points. The latest hike, a 75 basis points increase of the interest rate implemented on 29 December 2011, brought the rate to 8.75%. Afterwards, inflation has fallen from 8.6% year-on-year in December 2012 to 7.9% in February, which leaves it well above the 4% to 6% target range nonetheless. In its latest statement, the central bank noted that inflation started to ease, but also remarked that inflation has continued to remain notoriously above the target range. March 2012 Rabobank Economic Research Department Page: 2/5

3 Meanwhile, partially thanks to a tight control on expenditures, the fiscal outcome over 2011 was above target. The fiscal deficit was 0.8% of GDP, whereas a deficit of 1.3% of GDP was budgeted. Uruguay s public debt is still sizeable, but has continued to decrease steadily, falling from 59% of GDP in 2010 to 53% of GDP in The profile of the outstanding debt has also improved. The government has recently been able to swap existing dollar debt into peso debt, which reduces currency risk. Before the latest swaps the dollarization rate of the public debt had already fallen from 69% in 2007 to 53% in June2011. At the same time, the government has also been able the improve the maturity profile of its debt. Figure 1: Growth performance Figure 2: Current account 12.0 % change p.a. % change p.a % of GDP % of GDP e 13f External demand Government consumption Gross fixed investment e 13f -12 Private consumption Inventory changes Overall economic growth Trade Services Income Transfers Current account Uruguay continues to attract investment President José Mujica, a former guerrilla fighter, has continued the country s investment-friendly policies and the country continues to attract large inflows of Foreign Direct Investment (FDI). Inward FDI grew from 4.1% of GDP in 2010 to 5.2% of GDP in 2011 and is expected to stay at a high level in the coming years. Uruguay benefits from the large investments in a paper mill by the Finnish firm Metsa-Botnia, but this project is certainly not the only to attract FDI. Many subsectors of the economy have received foreign direct investments in recent years, with FDI being particularly strong in the manufacturing and services sectors. During 2011, important investments in an export oriented powdered milk and dairy plant, and a bio-ethanol plant were announced. The fact that inflows of FDI are large also implies that the widening of the current account deficit should not be a cause for concern. In 2011 Uruguay s current account deficit grew to 1.3% (see figure 2), with import growth being an important driver of the widening of the deficit. However, import growth has to a large extend been driven by the large FDI inflows that will boost the productive capacity of the economy. Uruguay s international investment position has become more negative in recent years, but the large inflows of FDI have helped to improve the profile of Uruguay s foreign liabilities, as the share of the FDI stock in the total foreign liabilities grew from 14% to 44% between 2005 and However, the high dollarization of the banking system remains a risk. Impact of problems in Argentina The impact of the balance of payments problems in neighboring Argentina have so far been somewhat limited. Argentina s trade policy has become extremely protectionist, but in 2010 only 7% of Uruguay s exports went to Argentina. Some industries are suffering though. Uruguay s room to retaliate is mitigated by the fact that it strongly relies on Argentina as a source of tourism income and FDI. Indeed, Uruguay s important tourist sector is rather vulnerable to shocks in Argentina, as Argentina accounts for more than half of Uruguay s tourism receipts. It seems that Uruguay is already feeling the impact of the recent tightening of capital and foreign currency controls by the Argentine government, as the total expenditure by foreign tourists in Uruguay fell March 2012 Rabobank Economic Research Department Page: 3/5

4 by 20% to roughly USD 650mln in January and February As Argentina is also an important source of FDI, Uruguay might also suffer from the problems in Argentina through reduced inflows of FDI, in particular if the balance of payments problems in Argentina worsen once Argentina s soy export season ends mid However, the relatively high level of foreign exchange reserves (of roughly 10 months of imports) provides an important cushion. March 2012 Rabobank Economic Research Department Page: 4/5

5 Uruguay Selection of economic indicators e 2013f Key country risk indicators GDP (% real change pa) Consumer prices (average % change pa) Current account balance (% of GDP) Total foreign exchange reserves (mln USD) Economic growth GDP (% real change pa) Gross fixed investment (% real change pa) Private consumption (real % change pa) Government consumption (% real change pa) Exports of G&S (% real change pa) Imports of G&S (% real change pa) Economic policy Budget balance (% of GDP) Public debt (% of GDP) Money market interest rate (%) M2 growth (% change pa) Consumer prices (average % change pa) Exchange rate LCU to USD (average) Recorded unemployment (%) Balance of payments (mln USD) Current account balance Trade balance Export value of goods Import value of goods Services balance Income balance Transfer balance Net direct investment flows Net portfolio investment flows Net debt flows Other capital flows (negative is flight) Change in international reserves External position (mln USD) Total foreign debt Short-term debt Total debt service due, incl. short-term debt Total foreign exchange reserves International investment position n.a. n.a. n.a. Total assets n.a. n.a. n.a. Total liabilities n.a. n.a. n.a. Key ratios for balance of payments, external solvency and external liquidity Trade balance (% of GDP) Current account balance (% of GDP) Inward FDI (% of GDP) Foreign debt (% of GDP) Foreign debt (% of XGSIT) International investment position (% of GDP) n.a. n.a. n.a. Debt service ratio (% of XGSIT) Interest service ratio incl. arrears (% of XGSIT) FX-reserves import cover (months) FX-reserves debt service cover (%) Liquidity ratio Disclaimer This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank Nederland, and regulated by the FSA. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy or completeness. It is for information purposes only and should not be construed as an offer for sale or subscription of, or solicitation of an offer to buy or subscribe for any securities or derivatives. The information contained herein is not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient. All opinions expressed herein are subject to change without notice. Neither Rabobank Nederland, nor other legal entities in the group to which it belongs accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith, and their directors, officers and/or employees may have had a long or short position and may have traded or acted as principal in the securities described within this report, or related securities. Further it may have or have had a relationship with or may provide or have provided corporate finance or other services to companies whose securities are described in this report, or any related investment. This document is for distribution in or from the Netherlands and the United Kingdom, and is directed only at authorised or exempted persons within the meaning of the Financial Services and Markets Act 2000 or to persons described in Part IV Article 19 of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2001, or to persons categorised as a market counterparty or intermediate customer in accordance with COBS The document is not intended to be distributed, or passed on, directly or indirectly, to those who may not have professional experience in matters relating to investments, nor should it be relied upon by such persons. The distribution of this document in other jurisdictions may be restricted by law and recipients into whose possession this document comes from should inform themselves about, and observe any such restrictions. Neither this document nor any copy of it may be taken or transmitted, or distributed directly or indirectly into the United States, Canada, and Japan or to any US-person. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of Rabobank Nederland. By accepting this document you agree to be bound by the foregoing restrictions. March 2012 Rabobank Economic Research Department Page: 5/5

Country update PARAGUAY

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